That’s because Bain Capital, under Romney as chief
executive officer, made about $1 billion in a leveraged buyout
12 years ago that remains controversial in Italy to this day.
Bain was part of a group that bought a telephone-directory
company from the Italian government and then sold it about two
years later, at the peak of the technology bubble, for about 25
times what it paid.

Bain funneled profits through subsidiaries in Luxembourg, a
common corporate strategy for avoiding income taxes in other
European countries, according to documents reviewed by Bloomberg
News. The buyer, Italy’s biggest telephone company, now has a
total market value less than what it paid Bain and other
investors for the directory business.

In Italy, the deals have spurred at least three books,
separate legal and regulatory probes and newspaper columns
alleging investors made a fortune at the expense of Italian
taxpayers. Boston-based Bain wasn’t a subject of the inquiries,
which didn’t result in any charges.

The sale of the government’s directory business is “a dark
chapter in the country’s privatization history, one that has
hurt Italians deeply,” said Bernardo Bortolotti, an economics
professor at Turin University who advised the Italian Treasury
on asset sales from 2002 through 2005. “It was a mistake from
the start, damaged by a lack of transparency and the use of
offshore funds.”

Personally Involved

While few ordinary Italians realize the link between Romney
and the investor group, the deal symbolizes Italy’s economic
woes and government futility as the nation struggles to convince
investors that it can repay Europe’s second-largest debt without
a bailout. The economy is in its fourth recession since 2001 and
unemployment is at a 13-year high.

Romney himself probably earned more than $50 million, and
possibly as much as $60 million from the Italian directory sale
of Seat Pagine Gialle SpA, according to a person familiar with
the matter. The deal turned into one of the biggest windfalls of
his tenure.

“With this investment, Mitt Romney and Bain Capital, with
its consortium partners, partnered with a new management team to
transform this company, and grow it into a tremendous success,”
said Michele Davis, a spokeswoman for Romney’s presidential
campaign. “Mitt Romney is running for President to put that
experience to work.”

‘Burned’ Investors

As Bain’s CEO from 1984 to 2001, Romney was personally
involved in the deal at various points, including the initial
decision to invest. He attended at least one meeting about it in
Boston, according to a participant. When Bain sold the directory
business in 2000, Romney, while still holding the title of CEO,
was in charge of preparations for the 2002 Winter Olympics in
Salt Lake City. Romney has contended that he gave up management
control of Bain in February 1999 to run the games.

“Mitt Romney and Bain played the role of successful
financial speculators at the peril of the Italian government and
the small stock-market investors who were burned by the sharp
decline in Seat shares,” said Giovanni Pons, a journalist for
la Repubblica and co-author of “L’Affare Telecom” (2002),
which recounts details of the Bain deal.

The use of offshore subsidiaries to avoid taxes has been
standard practice for private equity firms such as Bain, as well
as other big U.S. companies such as Google Inc., Facebook Inc.
and Cisco Systems Inc.

‘Full Compliance’

“The holding company structure was in full compliance with
all tax and reporting requirements in Italy, Europe, the U.S.
and the resident countries of other investors,” Bain Capital
said in an e-mail. “Investing through this common cross-border
structure ensured that investors were not unfairly subjected to
double taxation in multiple countries. The structure did not
reduce or defer income taxes for any U.S. investor.”

Romney’s extensive investments in tax havens are drawing
intensifying media scrutiny at the same time that revenue-starved governments around the world are cracking down on such
practices.

In recent weeks, Romney has faced increasing pressure to
release additional years of tax returns because of questions
over his 13.9 percent personal tax rate, his Swiss bank account,
an IRA valued at as much as $102 million and his investments in
Bermuda and the Cayman Islands.

An official for Italian Finance Minister Vittorio Grilli,
who oversaw privatizations at the Treasury when Italy sold the
telephone-directory business, declined to comment.

Cautionary Tale

The telephone directory episode may serve as a cautionary
tale now that the Italian government has approved an additional
round of state asset sales, said Italian Senator Elio Lannutti,
a member of the Italian Values party, which is headed by a
former magistrate who led anti-corruption probes in the 1990s.
Italy aims to raise 10 billion euros through those sales and
reduce the second-biggest government debt load in Europe.

Bain’s purchase and quick resale of the yellow pages
business is “an example of Italian capitalism, whereby those
with little capital are able to cheat the system and enrich
themselves,” Lannutti said. “It’s a mistake Italians hope
won’t be repeated again now.”

Twelve years later, Romney’s ties to the deal could hurt
his image in Italy, said Carlo Alberto Carnevale-Maffè, a
professor of strategy at Bocconi University’s School of
Management in Milan.

“There is always this underlying sentiment in Italian
public opinion that when you are in politics you don’t serve the
public good, you serve your personal interest,” Carnevale-Maffè
said. “Many will see Romney’s role in this as confirmation and
it will be interpreted in a very cynical way.”

Pagine Gialle

The origins of Bain’s deal can be traced to 1996, when the
Italian Treasury -- whose chiefs then included director general
Mario Draghi, now head of the European Central Bank -- began
privatizing several publicly owned businesses to reduce
government debt, making it easier to enter the euro zone.

One of the first companies to go was Seat Pagine Gialle, or
yellow pages, controlled by a state-owned company called Stet
SpA.

Bain got wind of the public auction through the Italian
unit of Bain & Co., the consulting company whose partners
created Bain Capital. The Milan-based subsidiary was run by
Gianfilippo Cuneo, a founder of McKinsey & Co.’s Italian
operations.

Cuneo also was part owner of an investment firm, which
needed additional capital to invest in the directory sale. Cuneo
brought the deal directly to Romney.

“He immediately understood that it was a credible
operation and it was worth devoting some time to it, so he
guaranteed the support of Bain Capital,” Cuneo said.

‘Sharp Questions’

Lorenzo Pellicioli, who became an investor in Seat and its
CEO, recalled Romney stopping in on a meeting in Bain’s Boston
offices about the pending acquisition.

“He came into the room, asked a couple of very sharp
questions immediately, we shook hands and he left,” Pellicioli
said.

The other investors in the Bain group included De Agostini
SpA, an Italian holding company with publishing and media
interests; Banca Commerciale Italiana SpA, then itself only
recently privatized and one of the country’s largest banks;
Telecom Italia SpA, Italy’s biggest phone company, then
government-controlled; and Cuneo’s investment group Investitori
Associati SpA.

Bain invested 36 million euros, or about $40 million,
according to a document compiled by Investitori Associati,
giving it a 16 percent share of the bidding group, and making it
the second-biggest investor, after Telecom Italia.

2000 Resale

Bain and its partners wound up acquiring 61.7 percent of
Seat for 853 million euros in November 1997, beating another
bidder.

The Italian government, which previously owned a
controlling stake in Telecom Italia, sold most of its shares in
the phone company in 1997. In February 2000, at the height of
the Internet bubble, Telecom Italia announced it was spending
14.6 billion euros to buy the remaining portion of Seat -- which
had since expanded its Web offerings.

While Bain won’t disclose its precise return on the
investment, Cuneo’s office said Investitori Associati’s return
was almost 28 times the initial investment. Bain, like other
private equity firms, enhances returns by using borrowed money
to finance acquisitions.

Bain moved profits through a series of subsidiaries in
Luxembourg, a country that makes it easy to get cash out without
paying taxes, according to corporate filings. Corporate records
in Luxembourg show Bain carried out technical steps for a tax-free repatriation of profits to the U.S.

‘Non-Existent’ Taxes

Investitori Associati said taxes paid by the Luxembourg
holding company in which it and the group members invested were
“almost non-existent,” according to an e-mail from Cuneo’s
office.

Seat’s stock price had almost tripled in the three months
leading up to Telecom Italia’s offer in February 2000. The
technology-heavy Nasdaq Composite Index increased 160 percent in
the two years leading up to the deal.

“It was sold at the peak of the Internet bubble” recalled
Pellicioli, Seat’s then-CEO. “It was not pure smoke, there was
a lot of real meat, but the multiple within the Internet bubble
and the timing helped.”

Italian regulators raised concerns that the price was
manipulated and investors traded on inside information and
probed alleged conflicts of interest. Two top Telecom Italia
officials also owned shares in Seat indirectly.

‘Ripped Off’

Italy’s stock market watchdog, Consob, and Turin prosecutor
Bruno Tinti investigated, according to a person familiar with
the matter and news accounts at the time. No charges were
brought.

Seat was sold in 2003 for 3.7 billion euros to another
group of private equity firms and today has a market value of 57
million euros. Today, all of Telecom Italia has a market
capitalization of 12.5 billion euros. Since February 2000,
shares in Telecom Italia have declined about 90 percent.

“The government got ripped off,” said Alessandro
Fogliati, who led a Stet shareholder group that voted against
the sale of Seat. “It was the beginning of the destruction of
Italian industry.”